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Updated Saturday, December 22, 2012 at 12:01 AM

What may happen if we fall off of fiscal cliff

By CONNIE CASS
The Associated Press

WASHINGTON — Efforts to save the nation from going over a year-end "fiscal cliff" were in disarray Friday as lawmakers and President Obama fled the capital for Christmas. "God only knows" how a deal can be reached, House Speaker John Boehner said.

Obama, off to Hawaii with his family, insisted a bargain could be struck before Dec. 31. "Call me a hopeless optimist," he said.

As the opponents go to their corners, it's a good time to review why it's so hard for Republicans and Democrats to compromise and what's at stake:

NEW YEAR'S HEADACHE

Partly by fate, partly by design, some scary fiscal forces come together at the start of 2013 unless Congress and Obama act to stop them. They include:

• Some $536 billion in tax increases, touching nearly all Americans, because various federal tax cuts and breaks expire at year's end.

• About $110 billion in spending cuts, about 9 percent for the Pentagon, 8 percent most everywhere else.

Hitting the national economy with that double whammy of tax increases and spending cuts is what's called going over the "fiscal cliff." If allowed to unfold over 2013, it would lead to recession, a big jump in unemployment and financial-market turmoil, economists predict.

IF THE DEADLINE IS MISSED

If New Year's Day arrives without a deal, the nation shouldn't plunge onto the shoals of recession immediately. There might be time to engineer a soft landing.

So long as lawmakers and the president appear to be working toward agreement, the tax increases and spending cuts could mostly be held at bay for a few weeks. Then they could be retroactively repealed once a deal was reached.

The big wild card is the stock market and the nation's financial confidence: Would traders start to panic if Washington, D.C., appeared unable to reach accord? Would worried consumers and businesses sharply reduce spending? In what could be a preview, stock prices worldwide dropped Friday after House Republican leaders' plan for addressing the fiscal cliff collapsed Thursday.

Federal Reserve Chairman Ben Bernanke has warned lawmakers the economy is already suffering from the uncertainty and they shouldn't risk making it worse by blowing their deadline.

IF THERE IS NO AGREEMENT

If negotiations between Obama and Congress collapse completely, 2013 looks like a rocky year.

Taxes would jump $2,400 on average for families with incomes of $50,000 to $75,000, according to the nonpartisan Tax Policy Center. Because consumers would get less of their paychecks to spend, businesses and jobs would suffer.

At the same time, Americans would feel cuts in government services; some federal workers would be furloughed or laid off, and companies would lose government business. The nation would lose up to 3.4 million jobs, the Congressional Budget Office predicts.

"The consequences of that would be felt by everybody," Bernanke says.

THE TAXES

Much of the disagreement surrounds the George W. Bush-era income-tax cuts, and whether those rates should be allowed to rise for the nation's wealthiest taxpayers. Both political parties say they want to protect the middle-class from tax increases.

Several tax breaks begun in 2009 to stimulate the economy by aiding low- and middle-income families are also set to expire Jan. 1. The alternative minimum tax would expand to catch 28 million more taxpayers, with an average increase of $3,700 a year. Taxes on investments would rise, too. More deaths would be covered by the federal estate tax, and the rate climbs from 35 to 55 percent. Some corporate tax breaks would end.

The temporary Social Security payroll-tax cut also is due to expire. That tax break for most Americans seems likely to end even if a fiscal cliff deal is reached, now that Obama has backed down from his call to prolong it as an economic stimulus.

THE SPENDING

If the nation goes over the cliff, budget cuts would touch all sorts of things from agriculture to law enforcement to the military to weather forecasting. A few areas, such as Social Security benefits, Veterans Affairs and some programs for the poor, are exempt.

THERE'S MORE AT STAKE

All sorts of stuff could get wrapped up in fiscal-cliff deal-making. A sampling:

• Some 2 million jobless Americans may lose their federal unemployment aid. Obama wants to continue the benefits extension; Republicans say it's too costly.

• Social Security recipients might see their checks grow more slowly. As part of a possible deal, Obama and Republican leaders want to change the way cost-of-living adjustments are calculated, which would mean smaller checks over the years for retirees who get Social Security, veterans' benefits or government pensions.

• The price of milk could double. If Congress doesn't provide a fix for expiring dairy-price supports before Jan. 1, milk-drinking families could feel the pinch.

• Millions of taxpayers who want to file their 2012 returns before mid-March will be held up while they wait to see if Congress comes through with a deal to limit the alternative minimum tax.

CALL THE WHOLE THING OFF?

In theory, Congress and Obama could just say no to the fiscal cliff, by extending all the tax cuts and overturning the automatic-spending reductions in current law. But Republicans and Democrats agree it's time to take steps to put the nation on a path away from a future of crippling debt.

Indeed, the automatic-spending cuts set for January were created as a last-ditch effort to force Congress to deal with the debt problem.

If Washington, D.C., bypassed the fiscal cliff, the next crisis would be just around the corner, in late February or early March, when the government reaches a $16.4 trillion ceiling on the amount of money it can borrow.

Boehner says Republicans won't go along with raising the limit on government borrowing unless the increase is matched by spending cuts to help attack the long-term debt problem. Failing to raise the debt ceiling could lead to a first-ever U.S. default that would roil the financial markets and shake worldwide confidence in us. Obama and Boehner are trying to wrap a debt-limit deal into their negotiations.

WHAT'S THE HOLDUP?

Obama says any deal must include higher taxes for the wealthiest Americans. Many House Republicans oppose raising anyone's tax rates.

Boehner tried to get the House to vote on his "Plan B" of higher taxes only on incomes over $1 million but dropped the effort when he didn't have the votes.

Republicans also insist on deeper spending cuts than Democrats want to make. And they want to significantly curtailing the growth of Medicare, Medicaid and Social Security, changes many Democrats oppose.

Obama, meanwhile, wants more temporary economic "stimulus" spending that Republicans say we can't afford.

THE COUNTDOWN

• Lawmakers aren't expected to return to the Capitol until after Christmas, leaving less than a week to vote on a compromise.

• The current Congress is in session only through noon Eastern time Jan. 3. Then it's the new Congress' problem.

The day in D.C.

Defense bill: Congress sent President Obama a $633 billion defense bill for next year that would tighten penalties on Iran to thwart its nuclear ambitions and bulk up security at diplomatic missions worldwide after the deadly Sept. 11 raid in Libya. The Senate voted 81-14 Friday for the massive measure that covers the cost of ships, aircraft, weapons and military personnel. The vote came less than 24 hours after the House passed the bill, 315-107. Obama has threatened a veto.

Seattle Times news services


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